Hilltop Holdings(HTH) - 2022 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements This section presents Hilltop Holdings Inc.'s unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, for the periods ended June 30, 2022 Key Financial Highlights (Q2 2022 vs Q2 2021) | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Net Income Attributable to Hilltop | $33.3 million | $99.1 million | | Diluted EPS | $0.45 | $1.21 | | Total Assets | $16.72 billion | N/A (as of 6/30/21) | | Total Deposits | $11.92 billion | N/A (as of 6/30/21) | | Total Stockholders' Equity | $2.06 billion | N/A (as of 6/30/21) | Consolidated Financial Statements Consolidated financial statements reveal a decrease in total assets to $16.7 billion and a significant drop in Q2 2022 net income to $35.3 million Consolidated Balance Sheet Summary (in billions) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $16.72 | $18.69 | | Loans held for investment, net | $7.84 | $7.79 | | Total Deposits | $11.92 | $12.82 | | Total Stockholders' Equity | $2.06 | $2.55 | Consolidated Statement of Operations Summary (in millions) | Account | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Interest Income | $112.1 | $107.9 | | Provision for (reversal of) credit losses | $5.3 | $(28.7) | | Total Noninterest Income | $239.3 | $339.9 | | Net Income | $35.3 | $101.9 | | Diluted EPS | $0.45 | $1.21 | - Net cash from operating activities was a source of $745.6 million in the first six months of 2022, a significant shift from a use of $325.9 million in the same period of 2021, offset by cash used in financing activities of $1.32 billion, largely due to a $442.3 million repurchase of common stock[18] Notes to Consolidated Financial Statements Notes detail accounting policies, portfolio composition, and key events including a significant stock repurchase, securities transfer, and impact of economic outlook on credit losses - The company's business is conducted through two primary units: PlainsCapital Corporation (PCC) for banking and mortgage services, and Hilltop Securities Holdings LLC for broker-dealer and investment banking services[20] - On March 31, 2022, the company transferred agency-issued securities with a book value of approximately $782 million from the available-for-sale to the held-to-maturity portfolio, based on the company's intent and ability to hold these securities to maturity[65] - In May 2022, the company completed a tender offer, repurchasing 14.9 million shares of common stock for $442.3 million, which exhausted the company's share repurchase authorization for the period[190] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 2022 financial performance, noting significant net income decreases driven by lower mortgage income, reduced broker-dealer revenues, and credit loss provisions - Financial results for the first half of 2022 reflect significant decreases in mortgage origination segment net gains from sales of loans, declines in net revenues within certain broker-dealer business lines, and a provision for credit losses compared to a reversal in the prior year[273] - The company completed a modified "Dutch auction" tender offer on May 27, 2022, repurchasing 14.9 million shares for $442.3 million, funded with cash on hand, which exhausted the company's share repurchase capacity[238] - Management identified headwinds for 2022 including tight housing inventories, declining deposit balances, rising interest rates, and inflationary pressures on costs, which are expected to continue to have an adverse impact on operating results[249] Segment Results Segment results show Banking income fell due to credit losses, Broker-Dealer was mixed, and Mortgage Origination pre-tax income dramatically dropped 91.5% due to lower volume and compressed margins Income (Loss) Before Taxes by Segment (Six Months Ended June 30, in millions) | Segment | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Banking | $97.8 | $151.6 | (35)% | | Broker-Dealer | $0.5 | $24.5 | (98)% | | Mortgage Origination | $12.1 | $142.1 | (91)% | | Corporate | $(33.1) | $(23.7) | (40)% | - The Banking segment's income decrease was primarily due to a $38.9 million swing in the provision for credit losses (from a reversal to a provision) and lower net interest income from the mortgage warehouse lending portfolio[294] - The Mortgage Origination segment's loan origination volume fell 37.3% in the first half of 2022 compared to 2021, with refinancing volume as a percentage of total originations dropping from 42.7% to 19.5%[345][347] Financial Condition Financial condition shows total assets at $16.7 billion, with a slight increase in securities, modest loan growth, increased allowance for credit losses, and decreased deposits - The company transferred approximately $782 million of securities from available-for-sale to held-to-maturity on March 31, 2022, citing its intent and ability to hold them to maturity amid changing market conditions[385] - The allowance for credit losses increased to 1.20% of total loans held for investment, up from 1.16% at year-end 2021, driven by a more pessimistic macroeconomic forecast anticipating a mild recession in the second half of 2023[417][420][434] - Non-performing assets decreased to $37.2 million (0.22% of total assets) from $54.0 million (0.29% of total assets) at year-end 2021, primarily due to paydowns on several commercial and industrial and residential loan relationships[436][448] Liquidity and Capital Resources Hilltop maintains strong liquidity and capital, despite holding company cash decreasing to $137.6 million due to a $442.3 million tender offer and a 17.24% Common Equity Tier 1 ratio Hilltop Holdings Inc. Regulatory Capital Ratios | Ratio | June 30, 2022 | Minimum Requirement (incl. buffer) | | :--- | :--- | :--- | | Common Equity Tier 1 | 17.24% | 7.0% | | Tier 1 Capital | 17.24% | 8.5% | | Total Capital | 19.90% | 10.5% | | Leverage Ratio | 10.53% | 4.0% | - Holding company cash decreased by $230.3 million, primarily due to the $442.3 million tender offer, partially offset by $265.7 million in dividends received from subsidiaries[461] - The Board of Directors declared a quarterly cash dividend of $0.15 per common share on July 21, 2022[463] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity, with the banking segment being asset-sensitive, while broker-dealer and mortgage segments face risks from securities inventory and MSRs Consolidated Net Interest Income Sensitivity (at June 30, 2022, in millions) | Change in Interest Rates (bps) | Change in NII (Amount) | Change in NII (%) | | :--- | :--- | :--- | | +300 | $120.3 | 23.77% | | +200 | $79.2 | 15.65% | | +100 | $40.1 | 7.93% | | -50 | $(33.7) | (6.66)% | - The banking segment is asset sensitive, with a cumulative one-year interest sensitivity gap of $1.1 billion, indicating that net interest income would generally rise if rates increase[508][509] - The mortgage origination segment's primary market risk is interest rate changes affecting the value of its mortgage servicing rights (MSR) portfolio, interest rate lock commitments (IRLCs), and mortgage loans held for sale, with the company using derivatives to hedge these risks[521][522][523] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[530] - No changes in internal control over financial reporting occurred during the second fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[531] PART II — OTHER INFORMATION Legal Proceedings This section details material pending legal proceedings, including a FINRA claim against Hilltop Securities for an alleged $13.0 million loss and an inquiry regarding PrimeLending's float down option - WR Investments, LP filed a claim against Hilltop Securities through FINRA, alleging a $13.0 million loss related to the sale of subordinated bonds, which Hilltop Securities believes are without merit[151] - PrimeLending received an investigative inquiry from the U.S. Attorney for the Western District of Virginia regarding its float down option and is cooperating with the request for materials[152] Risk Factors No material changes to the risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K were reported - No material changes to the risk factors disclosed in the 2021 Form 10-K were reported[535] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's Q2 2022 common stock repurchase, including a modified "Dutch auction" tender offer for 14.9 million shares at $442.3 million Share Repurchases (Q2 2022) | Period | Total Shares Purchased (in millions of shares) | Average Price Paid per Share (in USD) | | :--- | :--- | :--- | | April 2022 | 0 | N/A | | May 2022 | 14.9 | $29.75 | | June 2022 | 0 | N/A | | Total Q2 | 14.9 | $29.75 | - The share repurchases were conducted as part of a modified "Dutch auction" tender offer announced on May 2, 2022, and completed on May 27, 2022, for a total of $442.3 million[538] Exhibits This section lists Form 10-Q exhibits, including certifications from the Principal Executive Officer and Principal Financial Officer, and XBRL data files - The exhibits filed include certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002[539]